Month August 2011

The question of low end disruption should be a concern to any manager. It’s one of the most important sources of growth and has led to a vast amount of wealth creation.

Apple was an early low end disruptor by selling personal computers at a fraction of mini-computer prices. Toyota also offered “cheap” cars as an entrant in the market. Pixar made blockbusters for a lot less than live action studios. Google offers good enough office software without a license. Finally Microsoft built its whole business on low-end business software at knock-down prices.[1]

All these entrants made fortunes often at the expense of entrenched incumbents. Disruption grows the pie but also transfers a lot of value away from existing competitors.

So it should not be surprising that new products like the iPad should be scrutinized for their vulnerability to low end disruption. Brian Caufield asks the question if Apple has any future with the iPad given the potential for $99 tablets.

The question is indeed why not introduce an ultra-cheap tablet, for example from Amazon, which makes up for the low price with an innovative business model like selling content or user behavior data. After all, game consoles are sold this way. This is the classic razor/razor-blade business model.

The answer to why not is actually not simply that the economics don’t work. They might work some day even if they really don’t today.

The survey data from comScore is in and it suggests that smartphone penetration increased by a significant 1.58%. It is now 35.1% with 82.2 million users.

The weekly new user rate was about 863k/wk during July or about 586k/wk average over the last three months. I plotted the weekly add rates for the last 18 surveys and overlaid the three month moving average.

The chart shows that there is an upward slope to the upper and lower bounds of the moving average. Extrapolating trend forward gives me confidence in projecting 50% penetration by July 2012.

Samsung has, over the years, shipped phones using almost every operating system it could get a hold of. That includes Symbian, Windows Mobile, Windows Phone, LiMo, Android, PalmOS and OPhone.

As far as I know, today its portfolio includes Android, Windows Phone and its own Bada OS. The relaxed attitude to platform exclusivity at Samsung is in stark contrast with almost all other competitors who either for the sake of encouraging their own platforms or minimizing development costs maintained either one or two smartphone platforms.

Samsung justified their polyplatform strategy a few years ago by saying that different platforms are popular in different regions and as they did not want to be excluded from any market, they felt that being agnostic is the best policy.

The idea that platforms are not universal, but the result of provincial preferences is interesting. It’s a concession that “politics” plays a large part in mobile markets. However, for all the volume growth the strategy has produced, the strategy has not paid off in terms of higher margins or pricing power as the following chart shows.

Every few months rumors emerge of another technology company attempting to create a new product centered around the TV. Apple’s name comes up, of course, but so does Google. And Microsoft has been experimenting with no lesser degrees of vigor than the others. They all seem to be trying to make TV smarter, somehow.

But I would argue that these efforts are misguided. Television is more than the TV set or a set-top box, or any box. It’s more than channels or broadcasters or producers or aggregators or distributors. It’s all of these things; plus more. It’s a value network of great breadth and complexity. It’s a highly modularized industry with well-defined business model boundaries and inter-dependencies. I would argue that its very breadth is what has kept it rigid and immune from disruptive change.

If you look at each technological experiment to move to a new business model, they can all be reduced to the offer of an additional or substitutive module. There is no assumption made that the content being served will change. To put it in the context of mobile computing, it’s like trying to introduce a smartphone in a world without data networks–where the only service to be served is person-to-person calling. Unlike the Smartphone which could only have emerged to leverage the Internet, TV has no “smart content” to leverage. The “smartness” has to be not in the box but in the programming.

Of course, I don’t mean there’s a lack of good programming. What I mean is that there is no innovation in what a program is–the job it’s hired to do. The way it and its distribution fits into a person’s life. TV programs have not changed for half a century. They feature the same genres, the same duration, the same business model, the same series, format and scheduling and the same value chains as when “I Love Lucy” premiered in 1951. They assume people watch TV during the same time each day (while doing nothing else.) They also assume people are equally influenced by brand advertising and that audiences are largely homogeneous.

Contrast that with other media. The song, the book, the game, the newspaper even the movie have gone through consumption changes which have been supported by disruptive innovations. The portable music player, the ebook reader, the console and the mobile phone and the internet in general have all allowed consumption to conform to new usage patterns. The jobs that music is hired to do has changed dramatically. These re-definitions of what media is used for caused dramatic changes in both the production and distribution and hence the way value is captured in media.

Apple’s valuation has been discussedseveraltimes on Asymco. Apple’s relative valuation in terms of P/E ratio has not improved since the recession despite an acceleration in financial performance. As Apple seems to be getting punished for growth, we have to also ask if it is the only one.

When looking at valuation from an institutional investor or financial analyst point of view, the most common methodologies are discounted cash flow (DCF) as well as comparable company multiples. Most often, a DCF valuation is performed and cross-checked with comparable multiples. The justification for using comparable companies is the exposure to the same market dynamics including, for instance, market growth and profitability. So to understand this perspective, let us focus on a peer group valuation by looking at the average P/E multiples[1] for the calendar quarters 1/2005 to 1/2008[2].

Since starting this blog, I’ve thought about how to increase the participation of the audience and how to offer it as a platform for others. There is a fundamental limit to how much one person can contribute and “move the ball forward.” In that spirit, the method I’m initiating today is to allow comment writers to also write as contributor authors.

Dirk Schmidt is the first such author. Dirk is a resident of Finland but is a native of Germany. He worked in corporate finance for six years. Prior to that, Dirk was an intern at Nokia and practiced management consulting.

Dirk has an MSc from the Leipzig Graduate School of Management. He is on Twitter as @disc1979. Initially Dirk will write on topics related to financial markets and financial analysis.

As Asymco expands, it should be understood as a resource that has many individuals behind it. I look forward to welcoming many more contributors.

LG lost profitability in Q3 2009 and has not recovered it yet nor can it say when it might.

In a recent article on analyst reactions the prospect of LG’s exit from handset sales is raised:

LG’s handset division is the company’s biggest capital sinkhole and the shares have more than halved this year, making it the worst performer even when compared to HTC and Nokia.

“Selling the loss-making business is probably what investors want,” said Harrison Cho, an analyst at KB Investment & Securities. “But even with that option, LG wouldn’t get much from the sale. They should have sold it long ago before the overall landscape got tougher.”

“They simply missed the boat,” said Cho.

The dire business outlook had already pushed LG shares below their book value to a record-low multiple of 0.9 times its book value, much cheaper than Research In Motion’s 1.6 times, Nokia’s 1.1 and HTC’s 8.2.

That’s a huge discount for a company that is also a global brand in television and home appliances.

In a rare reflective moment Steve Jobs, after the launch of the iPad, mentioned Apple’s DNA. He said:

“Technology alone is not enough. It’s technology married with the liberal arts, married with the humanities, that yields the results that makes our hearts sing.

Nowhere is that more true than in these post-PC devices…that need to be even easier to use than a PC, that need to be even more intuitive than a PC; and where the software and the hardware and the applications need to intertwine in an even more seamless way than they do on a PC.

We think we are on the right track with this. We think we have the right architecture not just in silicon but in the organization to build these kinds of products.”

Steve Jobs’ legacy in product development has been clearly established and celebrated. What remains now is to determine his legacy in company development. If indeed Apple has the “right architecture in the organization” to serially build disruptive products. The collection of evidence begins today.

If Apple has indeed become Jobsian then it will have been a grand achievement. John Gruber is already convinced. He points out

Jobs’s greatest creation isn’t any Apple product. It is Apple itself.

If indeed he has built Apple sufficiently well to last then he has built an admirable process and not just a product. But this would not be a unique achievement. There have been other companies which preserved their founders’ cultural imprints, at least for significant periods beyond their departure. Consider that Disney, Ford and even HP and IBM remained successful for many years after the departure of their founders operating much the same way. They were infused with an indelible culture and preserved it for some time.

But a leader should aspire to do more. A leader should claim to have left a legacy not just on their company but on all companies.

Is it not more worthy to have changed civilization than the fortunes of a few?

I believe that Steve Jobs has actually sought just that. He put it as “making a ding in the universe.” This can be interpreted as developing products that “change everything”. But if the thing that Steve Jobs should be most proud of is the creation of Apple Inc. then how exactly could an Apple Inc. benefit the world?

This is where Jobs’ quote above strikes me as valuable. The lesson the world should take from Apple is that a company needs to become multi-dimensional. It needs to mix the core business with the disruptive innovation. It needs to combine the intellectual with the artistic. It needs to maintain within it the rational and the lunatic.

Apple’s violent success should serve as a powerful beacon that others should follow. Rather than copying its products other companies should copy Apple’s processes–its way of thinking. They should copy how Apple harbors the creative process and the technology processes under the same roof.

If they do heed this call then we should look forward to the the post-Jobs era as that time when large companies gained the ability to intertwine multiple core competencies. A time when humanism balanced corporatism. A time when we came to reconcile the rational and spiritual.

I’m late with posting my estimates for Apple’s current (fourth fiscal) quarter. Normally I post my estimates a few days after the previous quarter’s earnings are announced. This quarter however there was a lot to think about.

As pointed out in my analysis of the previous quarter, the iPhone sold at a far faster rate than I thought. I had expected it would be a “lame duck” in the quarter but the expanding distribution allowed it to continue at a triple-digit growth rate (142% in fact, the highest quarterly growth rate since 2009).

So the question for this quarter is, as always, what’s the iPhone growth? The problem for me is that I have to choose between two assumptions:

Due to distribution and dual product strategy (n-1 variant) production has now become more consistent.

This quarter is the actual transition quarter when iPhone 4 production is throttled down in favor of the new model.

The first assumption would put the iPhone growth at 100%+ while the second would place it in the 60% to 80% range. I decided to dial in a figure somewhere in between at 90% but I’m not very confident in this until we see more evidence that a new pattern has emerged.